How Do I Set Up Group Term Life Insurance Over $50K?
As an employer, if you offer group term life insurance coverage over $50,000 as a fringe benefit to your employees, there are some employee income tax considerations. You must determine what should be included in an employee’s taxable wages when being covered by employer paid group term life insurance. You’ll be able to calculate the amount you will need to add as a taxable fringe benefit by using IRS Publication 15-B. Note there are exceptions for S Corp Shareholders and if you have less than 10 employees, so be sure to confirm that the life insurance you offer meets the conditions of the IRS. For easier reading, check out our blog article Familiarize Yourself With Group-term Life Insurance Tax.
How to Set Up Taxable Life Insurance in Patriot
First, you will need to determine the amount of employer-paid life insurance coverage for each individual employee. If it is $50,000 or less, you do not need to include the cost of the insurance in an employee’s wages. However, if the coverage is over $50,000, this is where you will need to determine the taxable cost of the insurance that is beyond $50,000 of coverage for each employee. Our blog article about group term life insurance has a great explanation and example of how to calculate this.
Once you have the annual amount of taxable salary amount that needs to be added to an employee, do the following:
- Add a Taxable Money Type
You will set up a Money Type that will properly report the group term life cost on their W-2.
- Go to Settings > Payroll Settings > Hours & Money > Money Codes > Add New
- Name the money code something meaningful like “>50k GTL.”
- Keep the “Include as Taxable Income” box checked.
- For the W-2 box, choose Box 12, Label C
- Keep all other boxes unchecked, and Save.
2. Add a Corresponding Company Deduction
Now you’ll need to set up a post-tax deduction at the company level. This is so the employee does not actually get paid this money, but the taxable money will be reported on their W-2.
- Go to Settings > Payroll Settings > Deductions & Contributions > Deductions > Add New
- For the Type, choose “Post Tax.” This keeps the employee’s wages taxable, which is what we want.
- Name the deduction something meaningful like “>50k GTL Offset.” Keep in mind, this is a different deduction than what the employee uses to pay their share of life insurance premium, so be sure to name it something different.
- Select Fixed Dollar for the Method.
- Leave the amount blank. You’ll customize this when you assign this deduction to the employee.
- Leave the limits blank.
- Leave the W-2 box blank.
- Click Save.
3. Run a Sample Payroll
You’ll run a mock payroll using only your new “>50k GTL” money type with the taxable amount you have calculated using IRS publication 15 in Here’s how you do it:
- Payroll > Run a New Payroll
- Under “Show Advanced Options,” if you have other deductions and contributions you normally use, choose to skip all of the deductions and contributions. If you use direct deposit, turn off the direct deposit here.
- Click the toggle to “Show all Pay Types.” The new “>50k GTL” money type you added will appear.
- For the employee you want to pay, enter the amount of the group term life in that money type. Don’t add any other hours or money and turn the toggle for salaried employees to “off”.
- Continue to Pay Step 2.
- Click “View Details” at the top of the page.
- Find the employee, and note the net pay amount in the bottom right corner of the details. The Net Pay amount should be smaller than the original group term life earnings, due to the employee’s tax withholdings. Make note of this net pay amount, as this will be the amount of the employee’s offset deduction.
- Click “Cancel Payroll” at the bottom of Pay Step 2 and “Yes” to confirm. You are now ready to assign the offset deduction to the employee, and then run the actual payroll.
4. Assign the deduction to the employee
- Go to Payroll > Employee List > Select the employee name > Deductions & Contributions > Deductions > Add New.
- Select the “>50k GTL Offset” deduction.
- Enter the amount of the deduction, which is the net pay amount you noted in the sample payroll for the employee.
- Leave the limits blank, and click Save.
- This deduction is now ready to be used in a payroll
5. Run an actual payroll
Now you are ready to run the actual payroll that will show the group term life earnings, plus the offset deduction so the employee isn’t actually paid this money. While you can pay the group term life with their regular payroll, we recommend running a separate payroll just for the group term life.
- Go to Payroll > Run a New Payroll.
- Under “Show Advanced Options,” if you have other deductions and contributions you normally use, choose to skip all of the deductions and contributions except for your new “>50k GTL offset” deduction. If you use direct deposit, click the “disable” radio button under Direct Deposit also. Be sure the pay date falls in the correct year, in order to properly show on the W-2.
- Click the toggle to “Show all Pay Types.” The new group term life money type you added will appear.
- For the employee you want to pay, enter the amount of the group term life in that money type. Don’t add any other hours or money, and if you have salaried employees toggle the “PAY?” to “off” .
- Continue to Pay Step 2 and click “View Details.” Confirm that the employee’s net pay is $0.00.
- Click “Approve Payroll” to finish.
The group term life earnings will be included in Box 1, 3, and 5 of the employee’s W-2. Once W-2s are able to be created for the year, you can confirm this by going to Reports > W-2 & W-3 Summary > Find the employee’s name and view the amounts shown.
6. Inactivate the employee’s deduction
Because you don’t want this group term life offset deduction to keep coming out in future payrolls, you will want to inactivate this deduction on the employee’s record after you have run the payroll.
- Go to Payroll > Employee List > Select the employee name
- In their Deductions & Contributions tab, click the “Edit” icon for the group term life offset deduction.
- Uncheck the “Active” box and click “Save.”